Businesses receiving subsidies from non-EU states face wide-ranging intervention by the European Commission and mandatory clearance procedures for a range of activities, including acquiring other businesses and bidding for major public contracts.

The European Commission (EC) already has a broad range of tools to maintain a level playing field in the single market, including antitrust, merger control, public procurement, state aid and EU trade defence powers. However, the EC is concerned it has no tools to address market distortions caused by foreign subsidies. To address this gap, the EC has proposed a Regulation which would grant it wide-ranging powers to take action against foreign subsidies.

What would be caught?

The EC is primarily focused on transactions or public procurement bids where non-EU financial contributions are involved and there is the potential for distortion of competition in the EU. The Regulation would cover all sectors of the economy and would apply to the provision of both goods and services.

If a company engaged in business activity in the EU has received (direct or indirect) selective financial contribution from a non-EU government – including the UK government - any M&A or public procurement activity above specified financial thresholds would have to be pre-notified to the EC.

The Regulation would also give the EC catch-all powers to investigate any suspected distortive foreign subsidy granted to any non-EU entity engaged in business in the EU (including M&A or public procurement activity below the specified financial thresholds).

Mandatory pre-notification of M&A transactions

Mandatory pre-notification would be triggered by any acquisition or joint venture where either the target or one of the merging parties has EU turnover above €500 million and the foreign financial contribution is at least €50 million in aggregate over the previous three years. In this case, the transaction could not be implemented until cleared by the EC.

Notification of foreign financial contributions in public procurement

Any public procurement bid involving a financial contribution by a non-EU government where the estimated value of the procurement is €250 million or more would also need prior notification. The procurement process could continue during any resulting investigation, but no contract award could be made to the notifying party until favourable conclusion of the EC's investigation.

Catch-all investigatory tool

If a transaction or public procurement is below the thresholds requiring mandatory pre-notification (but above the €5 million de minimis threshold, calculated over a three-year period), it could be swept up in the catch-all investigatory tool. This applies to any other economic activity, small acquisition or procurement where the EC suspects a foreign subsidy and a distortion of the single market may be involved. This is intended to capture any and all economic activity carried out within the EU – not just M&A and public procurement.

What is the proposed review process?

After the EC's preliminary review of the relevant transaction or public procurement, if there are indications of the existence of a subsidy, an in-depth investigation may take place. For M&A activity, the proposal is 25 working days for preliminary review and 90 working days for in-depth investigation (in line with current EU merger control). For public procurement, the proposed timings are longer – 60 working days for preliminary review and 200 working days for in-depth investigation.

The EC could also investigate transactions or public procurements below the financial thresholds where it believes the undertaking has benefited from foreign subsidies in the previous three years. Such investigations (whether into transactions, public procurement or other economic activity) would comprise a preliminary review, followed by an in-depth investigation if there is sufficient evidence of a distortive foreign subsidy.

Under the review process, the EC will first consider whether a direct or indirect financial contribution by a non-EU government constitutes a subsidy. This is a wide-ranging definition and, like the EU's state aid rules, covers direct grants and zero-interest loans through to tax credits and preferential tax treatment. It also covers favourable purchases from or sales to the entity. If a foreign subsidy is identified, it will be for the EC to determine whether or not it distorts the single market.

The Regulation will provide that certain foreign subsidies are more likely to be distortive than others – for example, unlimited guarantees, subsidies to ailing companies without a restructuring plan, or subsidies directly facilitating an acquisition or the submission of an unduly advantageous tender. In other cases, the EC will consider the amount, nature and purpose of the subsidy as well as the situation of the company and the market concerned in reaching its determination.

What are the implications?

If the EC determines that a foreign subsidy is distortive, and its negative effects outweigh the positive ones, the EC would be able to impose measures or accept commitments to address the distortion, including structural or behavioural remedies, or even blocking the proposed transaction or contract award.

It is not yet clear what the substantive assessment test will be, if the Regulation is adopted. The EC will carry out a case-by-case assessment, balancing the distortive effects with the positive effects of the relevant economic activity. However, until this is applied in practice, there will be uncertainty as to the EC's approach. Equally, there are no proposed exemptions from the Regulation, so any non-EU entities which receive state funding and do business in the EU will be susceptible to scrutiny.

Regardless of how the EC decides to exercise these proposed powers, if the Regulation is adopted, state-supported non-EU entities or investors who wish to acquire EU companies, enter into joint ventures, bid for public contracts or simply do business in the EU will face more procedural hurdles to clear (including in some cases another mandatory pre-notification process).

The Regulation still needs to be discussed within the European Parliament and member states, but is expected to come into force towards the end of this year. The proposal is now open for public consultation for a period of eight weeks. If adopted, the Regulation will be directly applicable across the EU. Its impact on foreign investment within the EU, or on the grant of subsidies to the advantage of businesses active within the EU, remains to be seen.